Weed & Greed: the other type of “green” investment

The US weed industry

Now, that most of us have had our exams, we can finally go back to our normal lives and enjoy the little things that give us great memories (or make us forget them?). Beer is of course the first pick, but there is nothing new and interesting to talk about companies like Heineken or Anheuser-Busch InBev (Budweiser). We know all the relevant “metrics” about beer since childhood, right?

However, the situation is much different for the weed industry, which has seen great victories in the US in the recent years. Starting from the 8th of November last year, Marijuana is legalized for adult recreational use in 8 states and for medical use in up to 29 states. Some of the effects are plain obvious: the US has seen a 25% reduction in prescription pills overdose mortality in the states that legalized medical marijuana. Even more obvious are the official numbers regarding tax revenue: in 2015, Colorado collected up to $135 million in taxes on medical and recreational marijuana. In California, a much bigger state, tax revenues could exceed $3 billion in the next years.

New market, new problems

As a lot of firms had already entered the market, it already feels crowded. Most of them are bootstrapped by family or venture capital, and they participate in risky and unregulated stock markets. This fact means that most of those stocks don’t have to respect the strict regulatory requirements forced by big stock exchanges like NYSE. Therefore, there is an enormous potential risk of buying scams or frauds.

In addition, one aspect is usually overlooked when talking about the legalization of marijuana in the US. It is not that legalized as it is made to look like: 8 US states allow recreational use, but the plant is still considered a federally illegal substance. It basically means that weed businesses have almost no access to basic banking services, as financial institutions answer to the federal government. Providing cash would be considered as a money laundering intention. Moreover, firms selling marijuana also face differences in taxes. While companies selling federal legal products pay tax on their net profit, cannabis companies pay tax on their gross profit, greatly reducing the funds allocated for expansion and innovation.

Taking these in consideration, it seems that marijuana companies can put their faith only in cash (plenty of that in the streets) and in the fight for the legality of the plant at federal level, where it can have a significant impact. However, the DEA doesn’t seem to help the cause. Back in 2016, the DEA denied two petitions that would have de-scheduled marijuana from the status of Schedule 1 (illicit) substance.

There is a reverse causality problem coming from the DEA’s decision. In its finding, the agency cites a lack of clinical benefits-versus-risks evidence that comes from the fact that there are no relevant official clinical tests. The main problem is that clinical tests can’t be performed on Schedule 1 substances, making the problem of legalizing cannabis a big mess that would take years to be resolved.

For the passionate investors

If you were not convinced to avoid this market, you might really be a true fan (or consumer). For the moments when you want to take a break from the joy, we prepared you a list of three US and Canadian companies that have huge upside potential in the weed market.

GW Pharmaceuticals (NASDAQ: GWPH)
A biopharmaceutical company, its lead cannabinoid product candidate is Epidiolex, which is composed of pure plant-derived cannabidiol (CBD). Currently in Phase 3 trials, Epidiolex has huge revenue potentials as it has proven positive effects on epilepsy, genetic brain cancer and infantile spasms. Analyst predict annual sales between $800 million and $3 billion if the FDA approves the drug. Other drugs are GWP42006 (CBDV), which is in Phase 2 for adult partial onset epilepsy and autism, and GWP42003, which is in Phase 1 for Neonatal Hypoxic-Ischemic Encephalopathy (NHIE).

Aphria, Inc. (OTCQB: APHQF)
A Canadian-based company, it sells its retail products through its online store. It is involved in the research and development of cannabis oil and it is the first public company to report positive earnings in consecutive quarters. The firm has big ambitions, as it completed step two in the four-step expansion project to construct a 1.000.000-square-foot marijuana cultivation facility that could have a capacity of 70.000 kilograms of dried cannabis every year.

Canopy Growth Corporation (OTCPK: TWMJF)
Another Canadian-bases company, it is engaged in producing and selling medical and recreational marijuana in Canada. Revenue growth has been an astonishing 80%, not year to year, but quarter to quarter representing a 4200% revenue growth since June of 2014. The analysts expect the revenue to grow by a “modest” 200% annually, from $22.9 million to $68.7 million

Written by Radu Simion